Working capital
Working capital is the money a company needs to run its day-to-day business, measured as current assets minus current liabilities.
Working capital = Current assets − Current liabilities
What it is
Current assets are things that turn into cash within about a year: cash itself, money customers owe (receivables) and unsold stock (inventory). Current liabilities are bills due within a year, mainly money owed to suppliers (payables) and short-term loans.
The gap between them is working capital. It is the money locked up in keeping the business running from one day to the next.
How to read it
Positive working capital means the company has enough short-term assets to cover short-term bills. But more is not always better. If working capital keeps growing much faster than sales, cash is getting stuck in unpaid customer bills or unsold goods.
A cleaner way to track it is in days: receivable days (how long customers take to pay), inventory days (how long stock sits) and payable days (how long the company takes to pay suppliers). Receivable days plus inventory days minus payable days is the cash conversion cycle.
Why it matters
Money tied up in working capital is money that is not available as cash. That is why a company can report growing profit while its cash from operations shrinks.
Some strong businesses, like retailers that sell for cash and pay suppliers later, run with very low or even negative working capital. Their suppliers effectively fund the business.
Working capital eating cash
A company’s sales grow 10% from ₹1,000 crore to ₹1,100 crore. But receivables jump from ₹150 crore to ₹300 crore and inventory from ₹100 crore to ₹180 crore, while payables stay at ₹120 crore. Working capital rises from ₹130 crore to ₹360 crore. That extra ₹230 crore of cash is now stuck in the business.
Common mistakes
- Thinking higher working capital always means a safer company.
- Ignoring receivables and inventory growing faster than sales.
- Comparing working capital across sectors with very different business models.
Current assets are ₹500 crore and current liabilities are ₹350 crore. What is working capital?
- ₹150 crore
- ₹850 crore
- ₹350 crore
Show the answer
₹150 crore. Working capital = current assets − current liabilities = ₹500 − ₹350 = ₹150 crore.
Common questions
Is negative working capital bad?
Not necessarily. Businesses that collect cash quickly and pay suppliers later can run on negative working capital comfortably. It is a concern when it comes from unpaid short-term debt.
What is the working capital cycle?
It is the time between paying for raw materials and collecting cash from customers, usually measured as inventory days plus receivable days minus payable days.
Why does working capital affect cash flow?
When receivables or inventory grow, cash is tied up in them. That reduces cash from operations even if profit is rising.
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